Shares in oil and gas companies, including BP
BP, -1.85%
(BP) and Royal Dutch Shell
RDS.A, -0.68%
(RDSA), weakened 1.2% as forecasts for warmer U.S. weather pulled the rug from under crude-oil futures. See full story.

Further pressure on European markets came as U.S. stocks opened lower on Tuesday as investors returned from the three-day President's Day weekend. See full story.

The U.K.'s FTSE 100 index (UKX) closed down 0.5% at 6,412.30, the German DAX Xetra 30 index (1876534) slipped 0.1% at 6,982.91 and the French CAC-40 index (1804546) eased 0.5% at 5,713.45.

However, all indexes touched highs not seen for around six years on Monday and strategists at J.P. Morgan upgraded their stance on European equities to neutral from underweight saying that catalysts for a potential price-to-earnings de-rating are fading.

"We see potential for equities to overshoot our targets over the next few months," they said.

Markets have been supported recently by a continued flow of deal news, to which several companies added on Tuesday.

For starters, Volvo
VOLV
rose 1.5% in Stockholm after the Swedish truck maker said it's offered to buy Japanese rival Nissan Diesel for 540 Japanese yen a share, which amounts to 7.5 billion Swedish krona ($1.1 billion).

Shares of U.K. construction company Hanson (HNS) also closed higher, gaining 2.9% to 835 pence a share in London as Vulcan Materials
VMC, -1.90%
said late Monday that it has agreed to buy smaller U.S. aggregates company Florida Rock
FRK, +0.00%
in a $4.6 billion cash-and-stock deal. "We think this is excellent for Hanson," analysts at ABN Amro said.

Although not part of London's top index, shares of EMI Group (EMI) were a standout, rallying 8.4% to 240 pence after it confirmed that it received a fresh approach from Warner Music Group
WMG, -8.00%
EMI said there isn't currently a takeover proposal for its board to consider, however. See full story.

Also, drugs company Shire
SHPGY
(SHP) rose 3.7% after it said that it has agreed to buy New River Pharmaceuticals
NRPH
for about $2.6 billion in cash. See full story.

Earnings in focus

Turning to earnings, U.K. banking group Barclays
BCS, +4.85%
(BARC) said 2006 net income rose 33% to 4.57 billion pounds ($8.91 billion) as continued strong growth at its investment-banking arm helped offset a further jump in bad-debt charges. See full story.

Barclays' shares rose 0.4% after registering recent strong gains.

Meanwhile German automaker Volkswagen (766400) saw its shares hit a new high of 95.57 euros after it said 2006 net profit rose to 2.7 billion euros from 1.1 billion euros in 2005. Sales rose 11.6%, reaching 104.9 billion euros.

Volkswagen shares finished up 8% at 94.94 euros.

Earlier in the session, Morgan Stanley initiated coverage of Volkswagen at overweight.

The broker also downgraded BMW (519000) to underweight from overweight and cut its price target on the high-end German automaker by 18% to 45 euros.

It said its move was driven by a reduction to its medium-term earnings outlook, emerging competition from Porsche-VW-Audi and a "disturbing" trend of higher incentives in the U.S. BMW's shares lost 1.9% in Frankfurt.

In other major earnings news, shares of brewer Scottish & Newcastle (SCTN) declined 4% after the company said it expects the short-term impact of input price increases to be around 20 million pounds in 2007, although it continues to develop medium-term margins.

Trading for the first few weeks of the year has started well, the company said, after reporting that 2006 net income rose to 303 million pounds vs. 248 million pounds.

Peer Carlsberg, which also released earnings, saw its shares decline 6.7% in Copenhagen. The company swung to a fourth-quarter net loss of 80 million Danish kroner. Last year, it reported a profit of 317 million kroner profit. Carlsberg cited fierce and increasing competition in several markets, including Asia.

Most beer companies saw their shares increase last week as sector deal speculation was ignited by a report that InBev (000379310) and Anheuser-Busch were in merger talks.

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